Riding high on the growth momentum

The Indian economy’s growth continues to surprise: The recently released advance estimate of Gross Domestic Product (GDP) by the National Statistical Office showed that the economy will grow 7.3% in the current fiscal year 2023 24, slightly higher than last year’s 7.2% increase. The growth estimate was higher than Reserve Bank of India’s forecast (7%) and consensus projections (6.7%).

The number is likely to be revised over five more revisions spread across three years, but it serves as a useful early gauge of growth momentum, the source of growth, and broadly helps the Union ministry of finance in formulating its revenue and expenditure estimates ahead of the Union Budget in February.

PREMIUM The resilience of the Indian economy in the face of slowing global growth points towards its greater ability to deal with the polycrises since the pandemic. (Getty Images/iStockphoto) What are the key takeaways from the latest release? Two economic developments are becoming increasingly evident and entrenched.

First, India’s growth differential with the rest of the world has widened. India’s growth rate has kept a 7% handle for the last two years, but the world’s GDP growth has slowed. The International Monetary Fund projects global growth slowed from 3.5% in 2022 to 3% in 2023 and is expected to remain subdued at 2.9% in 2024, below the historical (2000 19) average of 3.8%.

The resilience of the Indian economy in the face of slowing global growth points towards its greater ability to deal with the polycrises since the pandemic. Indeed, the economy’s strength has surprised market analysts and commentators (including us), as it has navigated volatility in commodity prices, elevated geopolitical tensions, global interest rates at multi year highs, and weak global trade, all the while maintaining its macro stability.

By macro stability, we refer to strong growth while keeping fundamentals robust. The rupee has remained stable relative to previous crises, external financing needs remain manageable, forex reserves are more than adequate, and retail inflation, while admittedly still elevated, is driven more by supply side factors than runaway demand pull inflation.

Second, India’s growth mix is turning more favourable, shifting towards investment. While consumption still accounts for the largest share of GDP at around 57%, India’s investment/GDP ratio has increased to approximately 35% in FY 24, from 32% in the pre pandemic decade. Since the pandemic, investment has been driven by the public sector, but double digit growth in FY 23 24 for the second consecutive year also shows that private sector participation has picked up.

Not just the investment rate, but the efficiency of capital invested has also risen. If this is sustained, it could have a multiplier effect on overall economic growth, given that it is driven by investments in physical and digital infrastructure. Going ahead, what will these shifts mean for India? The economy has done very well over the past two years despite multiple headwinds, but the challenge now is to extend this growth phase.

India’s widening growth differential with the rest of the world could create fiscal and external imbalances — risks of a wider current account deficit, stickier fiscal deficits and elevated price pressures. For instance, as the economy grows faster, increased demand may result in increased imports or higher inflation.

Therefore, the challenge for India is to sustain growth in the 7% range, or possibly aim higher at achieving 8% growth, without losing out on its hard won macro stability. To enable this, rather than shifting to a new growth model, we think the economy needs to deploy its existing advantages more aggressively, starting with a sustained push towards raising investment further, financed by domestic savings.

Higher public investment in critical infrastructure also facilitates private investment, which is critical to creating jobs for India’s burgeoning working class. India’s much talked about demographic dividend can only be utilised if the rising labour force, especially women, is engaged in gainful employment.

Furthermore, even in the face of a slowing global economy, the target should be raising India’s share of global exports: India can, and should, aim to do better in both goods and services exports. The focus on manufacturing sector goods is important both from the point of view of employment (given it is more labour intensive than the services sector) and self sufficiency.

India’s rising importance as a global capability centre hub further underscores its position as a leading provider of telecom and business services exports. India is currently on the cusp of a breakout moment, poised to be the fastest growing economy in the medium term. But it will face challenges in a post pandemic world order of fractured global supply chains, uncertain geopolitics, and elevated interest rates.

Both fiscal and monetary policy have so far worked in tandem. A continued, joint focus on maintaining robust macro fundamentals could see the economy taking off as the biggest contributor to global growth by the end of this decade. Rahul Bajoria is managing director and head of EM Asia (ex China) Economics and Amruta Ghare is a regional economist at Barclays.

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